225554-cover - Electronic Frontier FoundationThis brief is filed on behalf of the following...

No. 08-964

IN THE

Supreme Court of the United States

_______________________________

ON WRIT OF CERTIORARI TO THE UNITED STATES

COURT OF APPEALS FOR THE FEDERAL CIRCUIT

225554

A(800) 274-3321 • (800) 359-6859

BERNARD L. BILSKI and RAND A. WARSAW,

Petitioners,

v.

DAVID J. KAPPOS, Under Secretary of Commercefor Intellectual Property and Director,

U.S. Patent and Trademark Office,

Respondent.

BRIEF OF ENTREPRENEURIAL ANDCONSUMER ADVOCATES AMICI CURIAE

IN SUPPORT OF RESPONDENT

JASON M. SCHULTZ

Counsel of RecordUC Berkeley School of LawBerkeley, CA 94720-7200(510) 642-1957

PAMELA SAMUELSON

Richard M. ShermanDistinguished Professor of Law& Information

UC Berkeley School of LawBerkeley, CA 94720-7200

Attorneys for Amici Curiae

i

Cited AuthoritiesPage

TABLE OF CONTENTS

TABLE OF CITED AUTHORITIES . . . . . . . . . iv

INTEREST OF THE AMICI CURIAE . . . . . . . 1

SUMMARY OF ARGUMENT . . . . . . . . . . . . . . . 3

ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

I. A “process” under § 101 of the Patent Acthas historically been limited totechnological processes . . . . . . . . . . . . . . . . 5

A. Congress did not intend for allprocesses to be patentable under§ 101 – only those that advancetechnological progress . . . . . . . . . . . . 5

B. A technological process advances thedevelopment, understanding, orapplication of a machine, manufacture,or composition of matter . . . . . . . . . . 9

II. Allowing patents on non-technologicalprocesses is unnecessary and harmful toinnovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

A. Patent protection has beenunnecessary to promote innovation innon-technological business andservice methods . . . . . . . . . . . . . . . . . . 14

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B. By their nature, non-technologicalbusiness and service innovators donot need patent incentives becausethey have less intensive R&D coststhan technological innovators . . . . . . 21

C. Non-technological innovations inbusiness and service disciplines areoften more diffuse and collaborativeand thus fall outside of the classicpatent “reward” paradigm . . . . . . . . . 22

D. Extending patent protection to non-technological methods in businessand services would disrupt settledexpectations and impose substantialadditional costs on innovators andinvestors . . . . . . . . . . . . . . . . . . . . . . . . . 23

1. Small businesses, individualentrepreneurs, and start-upcompanies would face new andpotentially insurmountablebarriers to entry if non-technological methods werepatentable . . . . . . . . . . . . . . . . . . . . 24

Contents

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2. Follow-on innovators wouldlikely have to divert currentR&D funding into defensivepatenting . . . . . . . . . . . . . . . . . . . . . 25

III. Reinforcing the long-standingtechnological limit on § 101 processeswould improve judicial and administrativeefficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

A. Strong § 101 limitations allow thePTO to efficiently reject non-technological patent applications . . . 28

B. Meaningful § 101 limitations allowcourts to efficiently dismiss non-technological patent litigation . . . . . . 31

C. Congress, not the courts, is theproper institution to expandpatentable subject matter . . . . . . . . . 33

CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

Contents

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Cases

AT&T Corp. v. Excel Commc’ns, Inc., 172 F.3d1352 (Fed. Cir. 1999) . . . . . . . . . . . . . . . . . . . . . . . 32

Babbitt v. Sweet Home Chapter of Comtys. for aGreat Or., 515 U.S. 687 (1995) . . . . . . . . . . . . . . 12

Bonito Boats, Inc. v. Thunder Craft Boats, Inc.,489 U.S. 141 (1989) . . . . . . . . . . . . . . . . . . . . . . . 14

Cochrane v. Deener, 94 U.S. 780 (1876) . . . . . . . . 9, 11

Corning v. Burden, 56 U.S. 252 (1853) . . . . . . . . 11

CyberSource Corp. v. Retail Decisions, Inc.,620 F. Supp. 2d 1068 (N.D. Cal. 2009) . . . . . . . 32

Diamond v. Chakrabarty, 447 U.S. 303 (1980) . . . 33

Diamond v. Diehr, 450 U.S. 175 (1981) . . . . . . passim

Dickinson v. Zurko, 527 U.S. 150 (1999) . . . . . . 13

eBay Inc. v. MercExchange L.L.C., 547 U.S. 388(2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13, 31

Eldred v. Ashcroft, 537 U.S. 186 (2003) . . . . . . . 6

Festo Corp. v. Shoketsu Kinzoku KogyoKabushiki Co., 535 U.S. 722 (2002) . . . . . . . . . 23

TABLE OF CITED AUTHORITIES

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Fort Props., Inc. v. Am. Master Lease, L.L.C.,609 F.Supp.2d 1052 (C.D.Cal. 2009) . . . . . . . . . 32

Gottschalk v. Benson, 409 U.S. 63 (1972) . . . 9, 10, 30, 33

In re Bilski, 545 F.3d 943 (Fed. Cir. 2008)(en banc) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim

In re Comiskey, 499 F.3d 1365 (Fed. Cir. 2007) . . . 30, 31

Jacobs v. Baker, 74 U.S. 295 (1868) . . . . . . . . . . . 11

Jarecki v. G. D. Searle & Co., 367 U.S. 303 (1961) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

KSR Int’l Co. v. Teleflex Inc., 550 U.S. 398 (2007) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Lab. Corp. of Am. Holdings v. Metabolite, Inc.,548 U.S. 124 (2006) . . . . . . . . . . . . . . . . . . . . . . . 4, 12

Nationwide Mut. Ins. Co. v. Darden, 503 U.S.318 (1992) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

New York Trust Co. v. Eisner, 256 U.S. 345 (1921) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

NTP, Inc. v. Research in Motion, Ltd. ,No. 3:01CV767, 2003 U.S. Dist. LEXIS 26837(E.D. Va. Aug. 5, 2003) . . . . . . . . . . . . . . . . . . . . 26

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Parker v. Flook, 437 U.S. 584 (1978) . . . . . 6, 9, 10, 31

Pfaff v. Wells Elecs., Inc., 525 U.S. 55 (1998) . . 24

Research Corp. Techs., Inc. v. Microsoft Corp.,No. CV-01-658-TUC-RCJ, slip op. (D. Ariz.July 29, 2009) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

State Street Bank & Trust Co. v. Signature Fin.Group, Inc., 149 F.3d 1368 (Fed. Cir. 1998) . . passim

Tilghman v. Proctor, 102 U.S. 707 (1880) . . . . . . 11

United States v. Blasius, 397 F.2d 203 (2d Cir.1968) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

United States Constitution

U.S. Const., art. I, § 8, cl. 8 . . . . . . . . . . . . . . . . . . 5, 8

Statutes

35 U.S.C. § 101 . . . . . . . . . . . . . . . . . . . . . . . . . . . passim

35 U.S.C. § 102 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

35 U.S.C. § 103 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

English Statute of Monopolies of 1623, 21 Jac. 1c.3, s.6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

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Legislative Materials

Hearing on Issues Relating to the Patenting ofTax Advice Before the Subcomm. On SelectRevenue Measures of the H. Comm. on Ways& Means, 109th Congress (2006) (statementof Ellen Aprill, Professor of Law, & John E.Anderson Chair of Tax Law, Loyola LawSchool, Los Angeles, California) . . . . . . . . . . . . 18

Other

John A. Allison & Mark R. Lemley, EmpiricalEvidence on the Validity of Litigated Patents,26 AIPLA Q.J. 185 (1998) . . . . . . . . . . . . . . . . . . 32

Kevin M. Baird, Business Method Patents: Chaosat the USPTO or Business as Usual?, 2001U. Ill. J.L. Tech. & Pol’y 347 (2001) . . . . . . . . . 28

Yochai Benkler, Coase’s Penguin, or, Linux andthe Nature of the Firm, 112 Yale L.J. 369(2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

James Bessen & Michael J. Meurer, PatentFailure: How Judges, Bureaucrats, andLawyers Put Innovators at Risk (2008) . . . 21, 22, 26

Mary Jo Bittner et al., Technology Infusion inService Encounters, 28 J. Acad. MarketingSci. 138 (2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

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Wesley M. Cohen et al., Protecting TheirIntellectual Assets: AppropriabilityConditions and Why U.S. ManufacturingFirms Patent (or Not) (Nat’l Bureau of Econ.Research, Working Paper No. W7552, 2000),available at http://ssrn.com/abstract=214952 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Robin Cowan, Paul A. David & Dominique Foray,The Explicit Economics of KnowledgeCodification and Tacitness, 9 Indus. & Corp.Change 211 (2000) . . . . . . . . . . . . . . . . . . . . . . . . 19

W. Mark Crain, The Impact of Regulatory Costson Small Firms (2005), available at http://www.sba.gov/advo/research/rs264tot.pdf . . . . 25

Jeroen P.J. de Jong & Eric von Hippel,Measuring User Innovation in Dutch HighTech SMEs: Frequency, Nature, andTransfer to Producers (MIT Sloan Sch. ofMgmt., Working Paper No. 4724-09, 2009),available at http://ssrn.com/abstract=1352496 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Robert W. Fairlie, Kauffman Foundation Indexof Entrepreneurial Activity: 1996-2009 (2009) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

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Frances X. Frei, Breaking the Trade-Off BetweenEfficiency and Service, Harv. Bus. Rev.,Nov. 2006, at 93 . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Stefania Fusco, Is the Use of Patents Promotingthe Creation of New Types of Securities?, 25Santa Clara Computer & High Tech L. J. 243(2009) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16, 28

Fred Gault & Eric A. Von Hippel, The Prevalenceof User Innovation and Free InnovationTransfers: Implications for StatisticalIndicators and Innovation Policy (MITSloan Research Paper No. 4722-09, 2009),available at http://ssrn.com/abstract=1337232 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Sara Kehaulani Goo, Building a ‘Googley’Workforce, Washington Post Online, Oct. 21,2006, http://www.washingtonpost.com/wp-dyn/content/article/2006/10/20/AR2006102001461.html . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Stuart J.H. Graham et al., High TechnologyEntrepreneurs and the Patent System:Results of the 2008 Berkeley Patent Survey,24 Berkeley Tech. L.J. (forthcoming 2009),available at http://ssrn.com/abstract-1429049 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15, 27

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Chairman Alan Greenspan, Remarks at the 2003Financial Markets Conference of the FederalReserve Bank of Atlanta (April 4, 2003),available at http://www.federalreserve.gov/B o a r d D o c s / s p e e c h e s / 2 0 0 3 / 2 0 0 3 0 4 0 4 /default.htm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Mark Grinblatt & Sheridan Titman, FinancialMarkets and Corporate Strategy (2nd ed.2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Helios Herrera & Enrique Schroth, ProfitableInnovation Without Patent Protection: TheCase of Derivatives 6 (Feb. 25, 2003),available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=384822) . . . . . . . . . . . 16

Adam B. Jaffe & Josh Lerner, Innovation and ItsDiscontents: How Our Broken Patent SystemIs Endangering Innovation and Progress, andWhat To Do About It. (2004) . . . . . . . . . . . 16, 28, 31

13 Thomas Jefferson, Writings of ThomasJefferson (Memorial ed. 1904) . . . . . . . . . . . . . . 14

Conrad Lashley, Towards an Understanding ofEmployee Empowerment in HospitalityServices, 7 Int’l J. Contemp. Hosp. Mgmt. 27(1995) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

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Josh Lerner, Where Does State Street Lead? AFirst Look at Finance Patents, 1970-2000, 57J. Fin. 901 (2002) . . . . . . . . . . . . . . . . . . . . . . . . . 29

Karl B. Lutz, Patents and Science: AClarification of the Patent Clause of the U.S.Constitution, 18 Geo. Wash. L. Rev. 50 (1949) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Robert P. Merges, The Uninvited Guest: Patentson Wall Street (Univ. Cal. Berkeley Publ. Law& Legal Theory Res. Paper Series, Paper No.126, 2003), available at http://ssrn.com/abstract=410900 . . . . . . . . . . . . . . . . . . . . . . . . 18, 19

Michael Polanyi, The Tacit Dimension (1967) . . . 19

Leo J. Raskind, The State Street Bank Decision:The Bad Business of Unlimited PatentProtection For Methods of Doing Business,10 Fordham Intell. Prop. Media & Ent. L.J.61 (1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Giles S. Rich, Principles of Patentability, 28 Geo.Wash. L. Rev. 393 (1960) . . . . . . . . . . . . . . . . . . . 7

Pamela Samuelson, Benson Revisited: The CaseAgainst Patent Protection for Algorithmsand Other Computer Program-RelatedInventions, 39 Emory L.J. 1025 (1990) . . . . . . 10

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Pamela Samuelson, What Effects Do LegalRules Have on Service Innovation? , inHandbook of Service Science (P.P. Maglio, C.A.Kieliszewski & J. Spohrer, eds., 2009),available at http://ssrn.com/abstract=1421946 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Andrew A. Schwartz, The Patent Office Meets thePoison Pill: Why Legal Methods Cannot bePatented, 20 Harv. J.L. & Tech. 333 (2007) . . 21

Carl Shapiro, Navigating the Patent Thicket:Cross Licenses, Patent Pools, and Standard-Setting (Mar. 2001), available at http://ssrn.com/abstract=273550 . . . . . . . . . . . . . . . . . 26

Fred Smith & Brian Dumaine, How I Deliveredthe Goods, Fortune Small Bus., Oct. 1, 2002,at 28, available at http://money.cnn.com/magazines/fsb/fsb_archive/2002/10/01/330568/index.htm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

John R. Thomas, The Patenting of the LiberalProfessions, 40 B.C. L. Rev. 1139 (1999) . . . . 12-13

Peter Tufano, Financial Innovation and First-Mover Advantages, 25 J. Fin. Econ. 213 (1989) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16, 18

U.S. Small Bus. Admin., The Small BusinessEconomy: A Report to the President (2009) . . . 24

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Eric von Hippel, The Sources of Innovation(1988) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Ivo Welch, Corporate Finance: An Introduction(2008) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Patents and Patent Applications

U.S. Patent Application No. 10/869,082(filed June 17, 2004) . . . . . . . . . . . . . . . . . . . . . . . 4

U.S. Patent Application No. 11/081866 (filedMar. 15, 2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4, 29

U.S. Patent Application No. 11/930,920 (filedOct. 31, 2007) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

U.S. Patent No. 5,102,338 (filed July 31, 1990) . . . 4

U.S. Patent No. 5,190,458 (filed Apr. 17, 1991) . . . 4

U.S. Patent No. 6,544,037 (filed Apr. 17, 2001) . . . 3

U.S. Patent No. 6,607,389 (filed Dec. 3, 2001) . . . . 3

1

INTEREST OF THE AMICI CURIAE

This brief is filed on behalf of the followingorganizations and individuals who fund, speak, write,and work to support entrepreneurship and consumerinterests, including the freedom to innovate.1

The Kauffman Foundation is the nation’s largestfoundation devoted to the advancement of understandingof entrepreneurship and the important role it plays ineconomies and societies.

The Electronic Frontier Foundation (EFF) is anonprofit, membership-supported public interestorganization working to protect consumer interests, civilliberties, innovation, and free expression in the digitalworld.

Public Knowledge is a Washington-based publicinterest group working to defend citizens’ rights in theemerging digital culture.

Brad Feld has been an entrepreneur and venturecapitalist for 25 years. He has personally been involvedin the creation of over 300 companies.

1. No counsel for a party authored this brief in whole or inpart, and no such counsel or party made a monetary contributionintended to fund the preparation or submission of this brief.No person other than amici curiae, their members, or theircounsel made a monetary contribution to its preparation orsubmission. Letters of the Parties’ general consent to file amicusbriefs are on file with the Court.

2

Robert J. Glushko is an Adjunct Full Professor atthe University of California at Berkeley in the School ofInformation and the Director of the Center forDocument Engineering. He has nearly thirty years ofR&D, consulting, and entrepreneurial experience.

Mitchell Kapor is the founder of Lotus DevelopmentCorporation and the designer of Lotus 1-2-3, the “killerapp” widely credited with having helped the personalcomputer become ubiquitous in the business world.

Jason Mendelson is a venture capitalist, lawyer andformer software engineer. He makes a living frominvesting in early-stage innovative companies.

Tim O’Reilly is the founder and CEO of O’ReillyMedia. O’Reilly is a computer book publisher, technologyconference producer, and technology advocate. He hasplayed a key role in commercializing the internet, opensource software, and Web 2.0.

Eric von Hippel is Professor and Head of theInnovation and Entrepreneurship Group at theMassachusetts Institute of Technology’s Sloan Schoolof Management. He specializes in research related tothe nature and economics of distributed and openinnovation.

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SUMMARY OF ARGUMENT

Petitioners ask this Court to reject Congress’ soundpolicy judgment, ignore § 101’s substantive limitationon patentable subject matter, and open the patentfloodgates in a wide variety of fields where exclusiverights are unnecessary and harmful. This Court shoulddecline this invitation for three reasons: (1) the historyand structure of § 101 limit the construction of “process”to technological processes; (2) allowing patents on non-technological methods such as those in the business andservice industries is unnecessary and harmful toinnovation; and (3) removing the long-standingtechnological limit on § 101 processes would underminethe institutional competence of both the United StatesPatent and Trademark Office (“PTO”) and the federalcourts to protect innovation.

Just over ten years ago, the Federal Circuit decidedState Street Bank & Trust Co. v. Signature FinancialGroup, Inc., 149 F.3d 1368 (Fed. Cir. 1998), knockingpatent law loose from its historical moorings andimproperly injecting patents into business areas wherethey were neither needed nor wanted. Since then, thePTO has been flooded with patent applications on a widevariety of non-technological processes that coverservices like arbitration, tax-planning, legal counseling,charity fundraising, and even novel-writing.2 The results

2. See, e.g., U.S. Patent Application No. 11/930,920 (filedOct. 31, 2007) (method for modeling and executing a deferredaward instrument plan); U.S. Patent No. 6,607,389 (filed Dec. 3,2001) (method of selecting a jury); U.S. Patent No. 6,544,037(filed Apr. 17, 2001) (method for teaching experiential writing);

(Cont’d)

4

have been nothing short of disastrous: many businessand service companies now face serious patent threatsto both their freedom to operate and to innovate. And,because few if any service-based industries need patentincentives to provide consumers with professionalcompetence and innovation, these costs far outweigh anyappreciable benefit.

The method in this case is a textbook example. IfMr. Bilski were allowed to patent his hedging method,he would be able to extract rents and potentially putout of business any individual or company who investsmoney or even advises others on investing in the sameway as he does. In patent law, limiting competition istolerable only when incentives are needed to promotetechnological progress. Bilski’s method, however, doesnothing to advance the useful arts; in fact, one need noteven use technology to invest as Bilski does. Moreover,there can be little question that investment firms—exemplars of service-based businesses—already striveto develop innovative and effective investing methodsin order to entice more clients. Thus, providing exclusiverights to a single individual or firm to control suchmethods goes against the core of patent policy. See Lab.Corp. of Am. Holdings v. Metabolite, Inc., 548 U.S. 124,126-27 (2006) (Breyer, J., dissenting) (“[S]ometimes too

U.S. Patent No. 5,102,338 (filed July 31, 1990) (method fortraining children in the art of dialogue writing); U.S. PatentNo. 5,190,458 (filed Apr. 17, 1991) (method of assessing aperson’s character); U.S. Patent Application No. 10/869,082 (filedJune 17, 2004) (process of relaying a story having a unique plot);U.S. Patent Application No. 11/081866 (filed Mar. 15, 2006)(method of directing funds to a charity).

(Cont’d)

5

much patent protection can impede rather than‘promote the Progress of Science and useful Arts.’”(quoting U.S. Const., art. I, § 8, cl. 8)) (emphasis inoriginal).

Congress implicitly recognized as much in 1952,when it limited patentable subject matter totechnological processes. Non-technological processessuch business methods and services were understoodto be excluded from that definition, an exclusion courtsrespected for decades. The Federal Circuit’s State Streetdecision marked a dramatic departure from this sensibleapproach. Amici urge the Court to bring patent law backin line with the history, structure, and purpose of thePatent Act.

ARGUMENT

I. A “process” under § 101 of the Patent Act hashistorically been limited to technological processes

A. Congress did not intend for all processes to bepatentable under § 101 – only those thatadvance technological progress

The history and structure of the Patent Act, and thisCourt’s own decisions, dictate that the Court shouldconstrue the word “process” to cover only technologicalprocesses – processes that advance the development,understanding, or application of machines, manufactures,and compositions of matter.

Petitioners’ interpretation of the word “process” in§ 101 contradicts the spirit and holdings of this Court’s

6

guiding cases. Petitioners ask this Court to read“process” in § 101 as “extremely broad,” effectivelycovering “any” process under the sun one could inventwithout significant limitation. See Pet’r ’s Br.18-20(arguing that aside from laws of nature and abstractideas, there are no limits on patenting processes). ButCongress did not authorize patenting of “any [process]under the sun.” See Resp’t’s Br. 28. In § 101, Congressexpressly limited patenting to four types of inventions—processes, machines, manufactures, and compositionsof matter—leaving other forms of innovation, such asmethods of organizing businesses, mathematicalformulae, alphabets, and languages, in the public domainwhere freedom to innovate is prevalent. See Diamondv. Diehr, 450 U.S. 175, 185 (1981) (noting that while eachindividual term of the four is to be construed broadly,“every discovery is not embraced within the statutoryterms”) (emphasis added); Parker v. Flook, 437 U.S. 584,588-89 (1978).

These limits are informed by the history of thePatent Act.3 When Congress last amended § 101 in 1952,it did so at the height of the industrial age, an era whenscience and engineering focused on machines,manufacturing and the creation of compositions ofmatter. These were the technologies that werepatentable at the time, along with the processes ofcreating them.

3. As this Court has held, “a page of history is worth avolume of logic.” Eldred v. Ashcroft, 537 U.S. 186, 200 (2003)(quoting New York Trust Co. v. Eisner, 256 U.S. 345, 349 (1921)).

7

Not surprisingly, the prevailing understanding atthat time was also that non-technological processes, suchas processes for doing business, practicing law,arbitrating disputes, raising money for charity, orwriting novels, were unpatentable. See In re Bilski, 545F.3d 943, 1001-02 (Fed. Cir. 2008) (en banc) (Mayer, J.,dissenting) (collecting cases that rejected patenting ofnon-technological methods). When Congress amended§ 101 in 1952, it merely ratified this prevailingunderstanding. See Nationwide Mut. Ins. Co. v. Darden,503 U.S. 318, 322 (1992) (holding that where no contraryindication is present, courts presume Congress intendedto ratify, rather than overturn, the prevailing legalunderstanding at the time). As Judge Giles Rich, one ofthe principle drafters of the 1952 Act, explained soonafter the Act was passed:

Of course, not every kind of an invention canbe patentable. Invaluable though it may beto individuals, the public, and nationaldefense, the invention of a more effectiveorganization of the materials in, and thetechniques of teaching a course in physics,chemistry, or Russian is not a patentableinvention because it is outside of theenumerated categories of “process, machine,manufacture, or composition of matter, orany new and useful improvement thereof.”Also outside that group is one of the greatestinventions of our times, the diaper service.

Giles S. Rich, Principles of Patentability, 28 Geo. Wash.L. Rev. 393, 393-94 (1960) (quoting 35 U.S.C. § 101).

8

What all of Judge Rich’s examples have in common –the diaper service, a more effective organizationalapproach, and improved techniques for teaching courses– is that they are non-technological in nature. Even if theyuse technology—a washing machine in the case of a diaperservice, telephones in implementing an improved methodof organization, and a blackboard and chalk in teaching—the processes themselves are not patentable because theydo not promote or advance the technologies themselves.See U.S. Const. art. I, § 8, cl. 8 (the purpose of patents isto “promote the progress of . . . useful Arts.”); KSR Int’lCo. v. Teleflex Inc., 550 U.S. 398, 427 (2007) (“[T]he resultsof ordinary innovation are not the subject of exclusiverights under the patent laws. Were it otherwise patentsmight stifle, rather than promote, the progress of usefularts.”).

Limiting patentability to technological processes alsocomports with the historical origin of “process”, which thisCourt has held is synonymous with “art.” Diehr, 450 U.S.at 182-84. As others have pointed out “[t]he term ‘usefularts,’ as used in the Constitution . . . is best represented inmodern language by the word ‘technology.’” Karl B. Lutz,Patents and Science: A Clarification of the Patent Clauseof the U.S. Constitution, 18 Geo. Wash. L. Rev. 50, 54 (1949).See also Resp’t’s Br. 16.

In short, patentable processes must be technologicalprocesses.

9

B. A technological process advances thedevelopment, understanding, or applicationof a machine, manufacture, or compositionof matter

What, then, is a “technological” process? Takentogether, the Patent Act and this Court’s interpretationsthereof suggest it is a process that advances thedevelopment, understanding, or application of amachine, manufacture, or composition of matter – theother subject matter categories of § 101.

This definition is grounded in this Court’s patentjurisprudence, which has consistently found thesesubject matters to be the “clues” for judging thepatentability of processes. See Diehr, 450 U.S. at 187(noting that the rejected Flook claims did not “containany disclosure related to the chemical processes atwork, the [electronic] monitoring of the processvariables, or the [mechanical] means of setting off analarm system.” (quoting Flook , 437 U.S. at 586))(emphasis added), 184 (finding the “clue” to patentabilityin an industrial rubber curing process to be its abilityto transform a composition of matter into rubber);Flook, 437 U.S. at 588 n.9 (finding strong clues topatentability lay in processes tied to particularmachinery or that change materials into a different stateor thing); Gottschalk v. Benson, 409 U.S. 63, 70-71 (1972);Cochrane v. Deener, 94 U.S. 780, 788 (1876) (“A processis . . . an act, or a series of acts, performed upon thesubject-matter to be transformed and reduced to adifferent state or thing.”) (emphasis added).

10

As this Court has held, these clues are to beinterpreted in light of the structure and purpose of thepatent laws. See Diehr, 450 U.S. at 192 (“[W]hen a claimcontaining a mathematical formula implements orapplies that formula in a structure or process which,when considered as a whole, is performing a functionwhich the patent laws were designed to protect(e.g., transforming or reducing an article to a differentstate or thing), then the claim satisfies the requirementsof § 101.”) (emphasis added). And while the applicationof a principle to a machine or the transformation of anobject into a different shape or things are “clues” topatentability, by contrast, the acts of claimingpostsolution insignificant activity, abstract ideas, mentalprocesses, laws of nature and natural phenomenon are“clues” to the lack of patentability. Further clues tounpatentability include claiming technology as a merefield of use limitation, Flook, 437 U.S. at 595, or claimingthat a process is merely capable of being carried out ona machine but does not require a particular machine forits implementation. Benson, 409 U.S. at 71-72; see alsogenerally Pamela Samuelson, Benson Revisited: TheCase Against Patent Protection for Algorithms andOther Computer Program-Related Inventions, 39Emory L.J. 1025 (1990).

The function of the patent laws historically was notonly to protect new machines, manufactures, andcompositions of matter, but also the “working or makingof any manner of new manufactures within this realm.”Bilski, 545 F.3d at 968 (Dyk, J., concurring) (quotingEnglish Statute of Monopolies of 1623, 21 Jac. 1 c.3, s.6).One example of such workings and makings was JamesWatt’s famous 1769 patent on a “[m]ethod of diminishing

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the consumption of fuel in [steam]-engines.” Id. at 970(citation omitted). These kinds of processes – theworking and making of machines and manufactures –advanced these technological subject matters, advancingthe useful arts. See also Corning v. Burden, 56 U.S.252, 267-68 (1853) (noting patentable processes mustproduce a certain effect or manufacture by means of“chemical action, by the operation or application of someelement or power of nature, or of one substance toanother”); Cochrane , 94 U.S. at 787-88 (findingpatentable processes to be “a mode of treatment ofcertain materials to produce a given result”); Tilghmanv. Proctor, 102 U.S. 707, 722 (1880) (manufacturingprocesses are within the meaning of the term “art”).Thus, each time this Court has spoken to thepatentability of processes, it has reinforced thatvalid processes must advance the development,understanding, or application of a machine, manufacture,or composition of matter.4

This definition of “process” is also consistent withthe canons of statutory construction. Under the doctrineof noscitur a sociis, courts look to surrounding termsto inform the meaning of any individual term in a statute.

4. See also Corning, 56 U.S. at 267 (a patentable art includes“methods, or operations, . . . called processes” such as the “artsof tanning, dyeing, making water-proof cloth, vulcanizing Indiarubber, [and] smelting ores”); Jacobs v. Baker, 74 U.S. 295, 297(1868) (quoting Curtis on Patents at 91:”But if the subject-matter be neither a machine nor a manufacture, nor acomposition of matter, then, . . . it must be an art, for there canbe no valid patent except it be for a thing made, or for the art orprocess of making a thing.”) (emphasis added) (internalcitations omitted).

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See Babbitt v. Sweet Home Chapter of Comtys. for aGreat Or., 515 U.S. 687, 687 (1995) (noting that “a wordis known by the company it keeps”), 702 (noscitur asociis counsels that a word “gathers meaning from thewords around it” (quoting Jarecki v. G. D. Searle & Co.,367 U.S. 303, 307 (1961)). Here, the word “process” isside-by-side with machine, manufacture, andcomposition of matter, and cannot be understood inisolation from its statutory companions.

As Judge Mayer notes in his Bilski Dissent, themachine-or-transformation test, if mechanically applied,is too easily circumvented with artful drafting. Bilski,545 F.3d at 1008-09 (Mayer, J., dissenting). Acomprehensive technological standard for patentabilityincorporates this Court’s clues into a holistic andworkable approach, tying the word “process” to thefunction of the patent laws (i.e., technological progress)while at the same time minimizing the mechanical andlexicographical games that artful drafters will play if amore wooden and less historical, statutory, and policy-driven standard is adopted.5

5. Some amici contend that lines such as “technology” aretoo blurry and thus unworkable as a boundary for patentablesubject matter. However, contentious definitions are neithernew to the law nor this Court. In fact, they exist in all areas ofintellectual property law to provide judicial and administrativeeconomy and to ensure that laws reflect public policy goals suchas protecting the public domain. See, e.g., Metabolite, 548 U.S.at 134 (Breyer, J., dissenting) (comparing line betweenpatentable processes and unpatentable principles to copyrightlaw’s distinction between copyrighted material and non-copyrightable ideas); John R. Thomas, The Patenting of the

(Cont’d)

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II. Allowing patents on non-technological processesis unnecessary and harmful to innovation

Drawing the line between technological and non-technological processes is not only historically andstructurally proper but also comports with sound patentpolicy. Expanding patentable subject matter to includenon-technological processes such as Bilski’s businessmethod and those in other service-based professions isunsound because (a) there are other sufficient incentivesfor innovation in these industries already; (b) theresearch and development (“R&D”) costs that typicallyjustify patent protection are lower in these fields thanin technological fields; (c) innovation is far morediffuse and collaborative in non-technological fields; and(d) extending patent protection to non-technologicalmethods in business and service industries woulddisrupt settled expectations and impose substantialadditional costs on investors and innovators.

Liberal Professions, 40 B.C. L. Rev. 1139, 1145 (1999) (comparingdoctrinal bars to patents on business methods, mental steps,algorithms and printed matter to copyright law limits thatprotect public domain). As this Court has pointed out in othercases, there is no reason to grant patent law exceptional statussimply because it presents similarly tough questions. See eBayInc. v. MercExchange L.L.C., 547 U.S. 388, 391-92 (2006);Dickinson v. Zurko, 527 U.S. 150, 165 (1999).

(Cont’d)

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A. Patent protection has been unnecessary topromote innovation in non-technologicalbusiness and service methods

“[F]rom the outset, federal patent law has beenabout the difficult business ‘of drawing a line betweenthe things which are worth to the public theembarrassment of an exclusive patent, and those whichare not.’” Bonito Boats, Inc. v. Thunder Craft Boats,Inc., 489 U.S. 141, 148 (1989) (quoting 13 ThomasJefferson, Writings of Thomas Jefferson 335 (Memorialed. 1904)). Patents on non-technological methods fallfirmly in the latter category.

Prior to the Federal Circuit’s ill-conceived StateStreet Bank decision, businesses and service innovationsthrived in the United States without patent incentives.See Resp’t’s Br. 24 (discussing myriad historical financialinnovations that occurred without the benefit of patentprotection); Leo J. Raskind, The State Street BankDecision: The Bad Business of Unlimited PatentProtection For Methods of Doing Business, 10 FordhamIntell. Prop. Media & Ent. L.J. 61, 93 (1999) (citing therapid growth of fast food restaurants, self-servicegasoline stations, quick oil change facilities, ATMs, andalternative long-distance telephone ser vices asexamples of business innovations that occurred withoutpatent incentives).

Today, even in more technologically-oriented serviceindustries, patents are rarely sought or needed toencourage innovation for new business models orservices. In a recent survey of over 1,300 hightechnology entrepreneurs, close to three-fourths of

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software and e-commerce startups reported that theydo not own patents and have not applied for them,compared with less than twenty-five percent of similarly-situated biotechnology and medical device companies.Stuart J.H. Graham et al. , High TechnologyEntrepreneurs and the Patent System: Results of the2008 Berkeley Patent Survey (“Berkeley Survey”), 24Berkeley Tech. L.J. (forthcoming 2009) (manuscript at19), available at http://ssrn.com/abstract-1429049.Software and e-commerce companies report also seekingpatent protection almost five times less frequently thancomputer hardware startups. Id. at 19-23 (reportingpatents offer “relatively mixed to weak incentives toengage in innovation” in these areas). See also id. at 24(reporting that patents provide between “slight” and“no incentive at all” for internal process innovations),30-31 (reporting “patenting” as the least importantincentive for innovation and maintaining competitiveadvantages). Thus, even in technology-based serviceindustries, patent protection is largely disfavored as asource of incentives for innovation; for non-technologicalinnovations, it would provide even less.

Instead, business- and service-oriented industriesrely upon a wide variety of other incentives that promoteinnovation. These include first-mover advantages,complementary assets, trade secrets, and customerloyalty. Berkeley Survey, supra, at 27-28 (noting thatfirst-mover advantages, complimentary assets, andtrade secrecy are the most important strategies forsecuring competitive advantages among software ande-commerce startups), 32 (noting, in summary, thatsoftware and internet startups strongly prefer first-mover advantages to patents when seeking incentivesto innovate).

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First-mover advantages are particularly prevalentin business and service innovation because they providecompetitive advantages that cannot be copied, such asconsumer brand loyalty and switching costs. See StefaniaFusco, Is the Use of Patents Promoting the Creation ofNew Types of Securities?, 25 Santa Clara Computer &High Tech L. J. 243, 256 (2009) (citing Peter Tufano,Financial Innovation and First-Mover Advantages, 25J. Fin. Econ. 213, 214-15, 234-35 (1989) and HeliosHerrera & Enrique Schroth, Profitable InnovationWithout Patent Protection: The Case of Derivatives 6(Feb. 25, 2003), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=384822); Adam B. Jaffe & JoshLerner, Innovation and Its Discontents: How OurBroken Patent System Is Endangering Innovation andProgress, and What To Do About It (2004) (“InnovationDiscontents”) at 47 (discussing brand loyalty andconsumer learning curves as strong first moveradvantages over competitors); Wesley M. Cohen et al.,Protecting Their Intellectual Assets: AppropriabilityConditions and Why U.S. Manufacturing Firms Patent(or Not) (Nat’l Bureau of Econ. Research, WorkingPaper No. W7552, 2000), available at http://ssrn.com/abstract=214952.

For example, in frequent flyer programs, the firstairline to convince a customer to invest often remainsthe primary program for that customer—despite robustcompetition from other airlines—because of thecustomer’s substantial investment in the program andthe high switching costs associated with starting over.Such programs also face little danger of the kind ofcopying and free-riding that patents are meant toprevent. One airline can copy the general rules and

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structure of another’s program, but the true value andcompetitive advantage are in the customer’s investmentand loyalty to their account and achieving the benefitsit offers. At the same time, competition keeps thepressure on airlines to continue innovating andresponding to consumer demand, so that the switchingcosts do not become worthwhile to the customer. Patentincentives, on the other hand, would not encourage suchcompetition—if customer-friendly programs likefrequent flying were patentable, then the first airlinewould gain the spoils, and other airlines would beprevented from innovating and competing. See also FredSmith & Brian Dumaine, How I Delivered the Goods,Fortune Small Bus., Oct. 1, 2002, at 28, available at http://money.cnn.com/magazines/fsb/fsb_archive/2002/10/01/330568/index.htm. (describing Federal Express’ first-mover advantages).

Patent monopolies are equally unnecessary for manyservice-driven Internet companies such as Google,Twitter, YouTube, and MySpace. These companies havefew, if any, patents and almost never enforce them. Yetthey command significant market shares through theirfirst-mover statuses, innovation-driven cultures, andemphasis on customer service and loyalty. See SaraKehaulani Goo, Building a ‘Googley’ Workforce ,Washington Post Online, Oct. 21, 2006, http://www.washingtonpost.com/wp-dyn/content/article/2006/10/20/AR2006102001461.html.

In addition to first-mover advantages, business andservice industries can use complementary assets tosecure their market positions and recoup theirinvestment. Lawyers who provide high quality services

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to clients may also attract those clients when additionalmatters such as litigation arise. A good doctor willattract the family and friends of patients. A goodplumber will attract repeat business for additionalhousehold problems. These business advantages—andthe innovation and quality required to maintain them—are based on loyalty and reputation, not patentincentives. See Pamela Samuelson, What Effects DoLegal Rules Have on Service Innovation? , inHandbook of Service Science (P.P. Maglio, C.A.Kieliszewski & J. Spohrer, eds., 2009), available at http://ssrn.com/abstract=1421946; Hearing on IssuesRelating to the Patenting of Tax Advice Before theSubcomm. On Select Revenue Measures of the H. Comm.on Ways & Means, 109th Congress (2006) (statementof Ellen Aprill, Professor of Law, & John E. AndersonChair of Tax Law, Loyola Law School, Los Angeles,California) (noting that existing economic incentives fortax planning already provide amble inducement for thedevelopment, promotion, and implementation of newstrategies).

Other non-patent incentives for innovation in thebusiness and service industries include ongoingprofessional development and expertise (e.g., the moreone performs and improves one’s service, the higherquality performance one offers) and customization(e.g., solving a particular client’s problem often providesinformation on the client that competitors lack).See Robert P. Merges, The Uninvited Guest: Patentson Wall Street (“Uninvited Guest”) 10-11 (Univ. Cal.Berkeley Publ. Law & Legal Theory Res. Paper Series,Paper No. 126, 2003), available at http://ssrn.com/abstract=410900 (citing Tufano, supra, at 235 (reporting

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a banker’s view that innovation is the best way toadvertise expertise) and Michael Polanyi, The TacitDimension (1967) (discussing the highly detailed, oftencontext-specific knowledge actually required to do acomplex job well)).

Rather than the repetition of identical items, which ischaracteristic of manufacturing and quite vulnerable tocopying, it is these individualized qualities of the servicemarketplace that provide competitive advantage. SeeConrad Lashley, Towards an Understanding of EmployeeEmpowerment in Hospitality Services, 7 Int’l J. Contemp.Hosp. Mgmt. 27, 27-32 (1995); Frances X. Frei, Breakingthe Trade-Off Between Efficiency and Service, Harv. Bus.Rev., Nov. 2006, at 93, 93-101. Put another way, theprovision of services cannot be duplicated in the same waythat a product or device can be copied; thus, the classicfree-riding problem in patent-intensive industries isavoided. See Uninvited Guest, supra, (citing Robin Cowan,Paul A. David & Dominique Foray, The Explicit Economicsof Knowledge Codification and Tacitness, 9 Indus. & Corp.Change 211, 211-53 (2000) (noting that customizedknowledge is difficult to codify and even harder to transferfrom one person to another)).

The potential perils of patent protection in thecontext of financial innovation are particularly ominous.As noted above, a chief driver behind financialinnovation is to make profits through perfect or near-perfect arbitrage. In other words, by repackaging andrestructuring existing financial assets in new forms orcombinations, arbitragers can take advantage of pricediscrepancies between two otherwise equivalent bundlesof assets. Arbitrage is a fundamental activity in financial

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markets. Moreover, it is one that has been quite activesince at least the middle ages, when Venetian bankerswere able to exploit regional differences in gold/silverexchange rates to turn a considerable profit. See IvoWelch, Corporate Finance: An Introduction 248 (2008).Because arbitrage activities offer short-term profits thatare often close to risk-free, such activities do not needthe decades-long protection of patents to incentivizetheir innovation and use.

Moreover, the activities of quick-acting arbitrageursare critical to efficiency and price discovery in financialmarkets. Virtually every accepted technique withinfinancial engineering for valuing financial assets, fromthe Capital Asset Pricing Model to Arbitrage PricingTheory to the Black Scholes options pricing formuladepend critically on the existence of arbitrageurs whowill identify and quickly dissipate arbitrageopportunities. See, e.g., Mark Grinblatt & SheridanTitman, Financial Markets and Corporate Strategy230-31 (2nd ed. 2002) (discussing the critical role ofarbitrage in financial derivatives pricing).

Viewed in this light, the effects of allowing patentprotection for investment strategies such as the onehere are plain. By its very nature, patent protectionallows a patentee to delay her activities of profitextraction, unafraid of competition by others. In anarbitrage context, this implies that a patenteearbitrageur may decide to “milk” her strategy for manymonths, years, or even decades, and her property rightto exclude others from the same strategy will induceher arbitrage position to become relatively gradual.Extending this across all (or even many) financial

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innovators, the repercussions for financial marketefficiency are potentially severe: market efficiency, pricediscovery, and the viability of benchmark valuationmodels in finance will be compromised by a system thatinduces a dampened, attenuated, and ultimatelyunproductive system of arbitrage.

B. By their nature, non-technological businessand service innovators do not need patentincentives because they have less intensiveR&D costs than technological innovators

Patents should only be granted to those inventions“which would not be disclosed or devised but for theinducement of a patent.” Graham v. John Deere Co. ofKansas City, 383 U.S. 1, 11 (1966). The high R&D costsof technology innovation, coupled with low costs ofcopying, are a major reason why patent incentives helpto promote innovation in technology-intensiveindustries. See James Bessen & Michael J. Meurer,Patent Failure: How Judges , Bureaucrats , andLawyers Put Innovators at Risk (“Patent Failure”) 216(2008).

Business and service innovations, however, do nottypically require the substantial up-front investments—e.g., engineering teams, R&D labs, expensiveequipment, and/or clinical trials—that undergird theperceived need for patent protection in manufacturinginnovations. See Andrew A. Schwartz, The Patent OfficeMeets the Poison Pill: Why Legal Methods Cannot bePatented, 20 Harv. J.L. & Tech. 333, 369 (2007) (noting“[t]here is no need to buy or build expensive machineryor run tests on prototypes” in service professions likethe practice of law). Without high up-front costs to

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recoup, there is simply less need to protect serviceinnovations with patents. Low R&D costs also allowinnovators to recoup their investments more quicklywithout the need of twenty years of patent protection.

C. Non-technological innovations in businessand service disciplines are often more diffuseand collaborative and thus fall outside of theclassic patent “reward” paradigm

In classic patent economics, we presume that thecosts of innovation will be efficiently internalized withinsingle firms or individuals and thus, those actors willneed exclusive rights to encourage investment andrecoup those costs. Patent Failure, supra, at 216. Inmost technological industries such as pharmaceutical,electronics, and manufacturing firms, single entitiesbear the full R&D costs of initial development,refinement, production, maintenance, and ongoinginnovation. These R&D costs are typically passed on toconsumers as part of the price of specific products, butconsumers have typically played a very minimal andindirect role in the actual practice of research anddevelopment.

In service and business industries, however, sucheconomics do not map easily or appropriately becauseinnovation is often derived from collaboration withcustomers. Mary Jo Bittner et al., Technology Infusionin Service Encounters, 28 J. Acad. Marketing Sci. 138,138-49 (2000). For example, professional servicesinnovations are often discovered and developed on-sitewith clients at their place of business or as a result of aclient’s own innovative approaches to the problem theprovider is helping to solve.

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Even when the subject matter is technological,consumers frequently innovate new processes and thenvoluntarily transfer that knowledge back to theproducers of the technology without patenting them andat no charge. See Jeroen P.J. de Jong & Eric von Hippel,Measuring User Innovation in Dutch High Tech SMEs:Frequency, Nature, and Transfer to Producers (MITSloan Sch. of Mgmt., Working Paper No. 4724-09, 2009),available at http://ssrn.com/abstract=1352496; FredGault & Eric A. Von Hippel, The Prevalence of UserInnovation and Free Innovation Transfers:Implications for Statistical Indicators and InnovationPolicy (MIT Sloan Research Paper No. 4722-09, 2009),available at http://ssrn.com/abstract=1337232. See alsoYochai Benkler, Coase’s Penguin, or, Linux and theNature of the Firm, 112 Yale L. J. 369 (2002); Eric vonHippel, The Sources of Innovation (1988).

Thus, granting patents for business and serviceinnovation fails to allocate rewards appropriately andpotentially bars some user-innovators from practicingthe very methods they underwrote or to which theycontributed.

D. Extending patent protection to non-technological methods in business andservices would disrupt settled expectationsand impose substantial additional costs oninnovators and investors

Setting aside their lack of necessity andinapplicability, patents for non-technological methodswould also actively hurt innovation and disrupt settledexpectations. Festo Corp. v. Shoketsu Kinzoku KogyoKabushiki Co., 535 U.S. 722, 739 (2002). As this Courthas wisely observed, “[t]he balance between the interest

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in motivating innovation and enlightenment byrewarding invention with patent protection on the onehand, and the interest in avoiding monopolies thatunnecessarily stifle competition on the other, has beena feature of the federal patent laws since theirinception.” Pfaff v. Wells Elecs., Inc., 525 U.S. 55, 63(1998). Despite the Federal Circuit’s pronouncements,this Court has never endorsed patenting for non-technological processes. Extending exclusive rights inthese areas would not only unsettle expectations butalso tip the patent balance away from innovation andtoward stifling competition.

1. Small businesses, individual entrepre-neurs, and start-up companies would facenew and potentially insurmountablebarriers to entry if non-technologicalmethods were patentable

Business and service industries attract a highproportion of individual entrepreneurs, smallbusinesses, and other so-called “startups.” See U.S.Small Bus. Admin. (“SBA”), The Small BusinessEconomy: A Report to the President, 20-21 tbl. 1.3 (2009)(showing 41.88 percent of new financial services aresmall businesses and 43.88 percent of new professionaland business services are small businesses). See alsoRobert W. Fairlie, Kauffman Foundation Index ofEntrepreneurial Activity: 1996-2009 (2009) (noting thatthe entrepreneurial activity rate – the percentage ofAmerican non-business-owning adults who start abusiness each month – increased slightly in 2008 over2007). These entrepreneurs already face disproportionalregulatory costs that inhibit their advancement in the

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marketplace vis-à-vis larger firms. See W. Mark Crain,The Impact of Regulatory Costs on Small Firms (2005),available at http://www.sba.gov/advo/research/rs264tot.pdf. Imposing a new layer of significant additionalcosts for patent searches, legal counsel, litigationdefense, and license negotiation would further draintheir resources, potentially deterring investment andentry.

Moreover, if the PTO is permitted to grant broadbusiness and service process patents, small start-upbusinesses would face an entirely new regime ofbusiness regulation – essentially requiring businessesto request private permits to operate from theircompetitors who have patents, independent of whatevertechnology the new business uses to compete.

2. Follow-on innovators would likely haveto divert current R&D funding intodefensive patenting

One of the key components of thriving industries isthe ability to advance the state of the art through follow-on innovation. In an ideal marketplace, one firm woulddiscover an innovative aspect of the business and otherswould follow, experimenting and modifying the originalmethod or product to find other advances. See ChairmanAlan Greenspan, Remarks at the 2003 Financial MarketsConference of the Federal Reserve Bank of Atlanta(April 4, 2003), available at http://www.federalreserve.gov/BoardDocs/speeches/2003/20030404/default.htm.

In technological industries, follow-on innovation isoften impeded by a plethora of pre-existing patents. In

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patent-intensive industries, firms often develop largepatent portfolios in order to navigate the so-called“patent thickets.” Carl Shapiro, Navigating the PatentThicket: Cross Licenses, Patent Pools, and Standard-Setting (Mar. 2001), available at http://ssrn.com/abstract=273550. While this often leads to marketinefficiencies, many technology industries have adaptedreasonably well to the existence of patent thickets intheir fields because they must already invest in patentsin order to offset the significant R&D costs they areincurring.

In traditionally patent-free industries, however, thisis not the case. There, firms have traditionally notsought or obtained patent protection. Therefore, if non-technological method patents should become apermanent part of the business and service industrylandscape, as had begun to be the case in the aftermathof State Street, and firms continue to acquire patentson these methods, competing firms and new marketentrants will have no choice but to develop defensivepatent portfolios and blocking patents of their own inorder to avoid the potentially catastrophic risk ofinjunctions on their primary business models. See, e.g.,NTP, Inc. v. Research in Motion, Ltd., No. 3:01CV767,2003 U.S. Dist. LEXIS 26837, at *3 (E.D. Va. Aug. 5,2003) (staying permanent injunction of RIM’sBlackberry Wireless Email Service pending appeal duein part to a “demonstrated and increasing use” by thepublic); Patent Failure, supra, at 176 (noting evidenceof large incumbents using patent injunctions anti-competitively as a means of discouraging entry by smallinventors). Ironically, in order to acquire these patents,business and service firms would have to divert

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resources away from their R&D budgets in order to paylegal fees and PTO fees, thereby potentially reducinginnovation in their fields. See Berkeley Survey, supra,at 44 (noting that many startups, even in technologysectors, do not file patents because of their high cost).All of this goes against the current settled expectationsof innovators and investors in these fields.

III. Reinforcing the long-standing technologicallimit on § 101 processes would improve judicialand administrative efficiency

Reinforcing the traditional view of § 101 will alsohelp the PTO and the courts to use public resourcesmore appropriately. Whether a claim qualifies aspatentable subject matter under § 101 is a “thresholdinquiry” and any claiming that fails to meet therequirements of § 101 must be rejected, even if it meetsall other legal requirements of patentability. See Diehr,450 U.S. at 188. However, if the word “process” in § 101were construed so broadly as to cover all potentialprocesses, technological or otherwise, this “thresholdinquiry” would become superfluous. See United Statesv. Blasius, 397 F.2d 203, 207 n.9 (2d Cir. 1968) (“Thereis a presumption against construing a statute ascontaining superfluous or meaningless words or givingit a construction that would render it ineffective.”).Moreover, both the PTO and the federal court systemmust be able to rely on § 101 in order to efficiently stemthe tide of faulty applications and litigations that haveflooded the patent system.

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A. Strong § 101 limitations allow the PTO toefficiently reject non-technological patentapplications

A technological § 101 standard gives the PTO ameaningful, efficient and predictable rule against whichto test patent applications, at the threshold of the process,before significant costs are incurred. Every year, the PTOstruggles to review and grant patents on appropriateinventions. The longer the PTO takes to reviewapplications, the less protection and the fewer incentivesare returned to innovators. See Innovation Discontents,supra, at 11. Since State Street, there has been a dramaticincrease in the number of business and service methodpatent applications, adding to this problem. See Fusco,supra, at 108; Kevin M. Baird, Business Method Patents:Chaos at the USPTO or Business as Usual?, 2001 U. Ill.J.L. Tech. & Pol’y 347, 348 (2001) (noting backlog ofbusiness method applications at the USPTO). Therefore,not only do non-technological process patent applicationsthreaten freedom to innovate, they also divert PTOresources away from legitimate applications in thetraditional technological industries.

Issuing a § 101 rejection is among the easiest ways forthe PTO to take action. See Bilski, 545 F.3d at 950 n.1(noting that a PTO examiner may reject a claim solely onthe basis of § 101 and independently of any othersubstantive requirement and suggesting that examinersfirst identify and reject claims on that basis). Unlikerejections under § 102 (lack of novelty) or § 103(obviousness), § 101 determinations are made on the claimlanguage alone and thus do not require extensive researchinto the state of the art or the details of other documents.This can save examiners significant research time and leadto faster rejections of non-technological applications.

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Moreover, the PTO has a long history of hiring andtraining technologists to be patent examiners; to forceit to hire bankers, arbitrators, charity fund-raisers, andstorytellers to help examine the wide array of non-technological applications that Petitioners would allowwould be both a waste of resources and outside of thecompetencies of the Office. See Josh Lerner, Where DoesState Street Lead? A First Look at Finance Patents,1970-2000, 57 J. Fin. 901, 902 (2002) (noting a surprisingscarcity of relevant academic citations among the post-State Street business method application surge andsuggesting this as a result of the PTO’s lack of trainingand experience with non-technological processes).A meaningful § 101 standard takes advantage of theinstitutional competencies of the PTO, allowing it toeasily reject non-technological applications, and focusingits resources on examining technological innovations toreward those innovators and reduce the current PTObacklog.

As an example of how such a standard would work,consider U.S. Patent Application No. 11/081866 (filedMar. 15, 2006) (method of directing funds to a charity)in which the primary claim is:

A method of directing funds to a charity, comprising:

receiving a first signal from a donor computer,the first signal including instructions, arequest or advice indicating a desire to directone or more payments to a donor-selectedcharity, at least a portion of the payment tobe transferred from a giving account, the

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giving account having been established to holdfunds for charitable gift-giving.

This is essentially a business method patent forcharities. Under Petitioners’ rule, this would clearly bepatentable.

However, under a rule requiring patentableprocesses to be technological, this claim quickly fails. Itis not a process for advancing the development,understanding, or application of a machine, amanufacture, or a composition of matter. Instead, muchlike Judge Rich’s example of a diaper service, it merelyuses technology (a donor computer) without promotingits progress. Under a robust technological § 101standard, the PTO could easily and quickly reject thisapplication and focus its resources on other applicationsof more merit.

Under a robust § 101 technological standard, theBilski application fares no better. Bilski’s method makesno claim to advance the development, understanding,or application of machines, manufactures, orcompositions of matter. Nor would the mere addition ofa machine make it technological. See Benson, 409 U.S.at 71-72 (rejecting claims even though capable of beingcarried out on a computer). No artful drafting wouldsave it, and a strong technological § 101 standard wouldallow for easy disposition.

Nor would the method from In re Comiskey, 499 F.3d1365 (Fed. Cir. 2007), survive. There, the applicantclaimed a method and a system of mandatory arbitrationfor disputes arising from unilateral and contractual legal

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documents. Id. at 1368. Again, nothing present in themethod attempts to advance the development,understanding, or application of machines, manufactures,or compositions of matter. Thus, it would be easily foundunpatentable by the PTO. Merely implementing it on amachine (as Comiskey did in later claims) fails too becausethe technology employed is neither advanced nor evennecessary to carry out the process, id. at 1379, and wouldmerely be a field-of-use limitation. See Flook, 437 U.S. at595.

B. Meaningful § 101 limitations allow courts toefficiently dismiss non-technological patentlitigation

Beyond the PTO, a robust § 101 threshold would alsoempower courts to reject patent claims that wereerroneously granted to improper subject matter. Much hasbeen made of the avalanche of patent litigation in thefederal court system, especially as it relates to so-called“patent trolls” – entities that acquire patents for rent-seeking but which do not actually produce productscovered by the patent. eBay, 545 U.S. at 396 (Kennedy, J.,concurring) (“An industry has developed in which firmsuse patents not as a basis for producing and selling goodsbut, instead, primarily for obtaining licensing fees.”). Theselawsuits are problematic because they are so costly. Rarelydoes one win or lose such cases on summary judgment.Parties often have little choice but to settle to avoid thecost of litigating through trial and possible appeal. SeeInnovation Discontents, supra, at 14.

Restoring § 101 as a substantive gatekeeper oninappropriate patent claims will allow at least some

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defendants who are fighting patent trolls and othersuspect litigants to bring relatively straight-forwardmotions to dismiss and for summary judgment on § 101issues. See AT&T Corp. v. Excel Commc’ns, Inc., 172F.3d 1352, 1355 (Fed. Cir. 1999) (noting, on appeal froma motion for summary judgment, that § 101determinations are an issue of law). This could have asubstantial effect on reducing unwarranted andinappropriate patent litigation in the federal courtsystem. Compare John A. Allison & Mark R. Lemley,Empirical Evidence on the Validity of LitigatedPatents, 26 AIPLA Q.J. 185, 187, 208 tbl. 1 (1998) (findingthat from 1989 through 1996, even before State Street,expansive subject matter doctrines resulted in less than1% of patents being invalidated by courts for impropersubject matter) with CyberSource Corp. v. RetailDecisions, Inc., 620 F. Supp. 2d. 1068, 1081 (N.D. Cal.2009) (ruling, after the Bilski en banc decision, that abusiness method patent was invalid subject matter onmotion for summary judgment and observing that “[t]heclosing bell may be ringing for business methodpatents[.]”), Fort Props., Inc. v. Am. Master Lease,L.L.C., 609 F.Supp.2d 1052 (C.D.Cal. 2009) (holding areal estate business method patent invalid underBilski’s machine-or-transformation test), and ResearchCorp. Techs., Inc. v. Microsoft Corp., No. CV-01-658-TUC-RCJ, slip op. at 9 (D. Ariz. July 29, 2009) (holdingtwo patents invalid on motion for summary judgmentunder Bilski ‘s machine-or-transformation test). Astrong § 101 standard helps courts resolve these casesquickly and efficiently.

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C. Congress, not the courts, is the properinstitution to expand patentable subjectmatter

Finally, some argue that upholding the historically-grounded definition of “process” leaves out important areasof innovation from the world of patents. Bilski, 545 F.3d at1011 (Rader, J., dissenting); Id. at 980-81 (Newman, J.,dissenting). However, just as it is within the institutionalcompetence of the PTO and the courts to protectinnovation by using § 101’s historic threshold, expansionof patentable subject matter is the institutional domain ofCongress. Diamond v. Chakrabarty, 447 U.S. 303, 318(1980); Benson, 409 U.S. at 73. Thus, should patentablesubject matter need expansion, it is for Congress toundertake, not this Court.

CONCLUSION

In order to preserve the freedom to innovate andproper patent policy, the Court should affirm for thereasons stated above.

Respectfully submitted,

JASON M. SCHULTZ

Counsel of RecordUC Berkeley School of LawBerkeley, CA 94720-7200(510) 642-1957

Attorneys for Amici Curiae

PAMELA SAMUELSON

Richard M. ShermanDistinguished Professorof Law & InformationUC Berkeley School of LawBerkeley, CA 94720-7200

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